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John Turney
Traders Magazine Online News

Foreign Exchange Infrastructure: Yesterday, Today and Tomorrow

In this exclusive to Traders Magazine, John Turney, Global Head of Outsourced FX at Northern Trust, discusses the evolution of the fx infrastructure and what is to come.

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October 14, 2008

Gunning for the Old Guard

MTFs set up shop to challenge established exchanges

By Peter Chapman

Also in this article

It's crunch time in Europe. Almost one year after the Markets in Financial Instruments Directive, or MiFID, went into effect, the battle to wrest market share from Europe's stock exchanges is about to begin in earnest.

As Traders Magazine was going to press, three new displayed venues were in the process of establishing themselves, bringing to four the number of displayed multilateral trading facilities (MTFs) gunning for a piece of the $80-billion-a-day cash equities trading business. That's the total aggregate value of shares that changes hands in Europe each day.

Turquoise, founded by broker-dealers that collectively trade more than half of European equities volume, launched Aug. 15. Nasdaq OMX was planning to launch at the end of September. BATS Holdings, whose subsidiary BATS Trading handles about 10 percent of all U.S.-traded shares, plans a launch early next month. The three join Chi-X, which is owned by Instinet and a consortium of 13 investment banks, and has already made inroads into European trading after nearly two years of operation.

"We are going after the primary markets in Europe," Chris Concannon, Nasdaq's executive vice president for transaction services, said at a recent press conference. "We hope to be greater than 1 percent [of the market] and closer to 5 percent within a year."

Analysts expect MTFs will account for about 20 percent of total European equities volume in the next few years. They'll get that from the incumbent exchanges, as well as a new crop of high-frequency traders expected to emerge as a result of MiFID.

No Easy Road

Still, the road to success for the MTFs is not expected to be easy. There are no requirements for brokers or exchanges to route orders to them, and the lack of a centralized clearing and settlement structure could discourage potential customers by adding costs on the back end.

In addition, the old guard is not standing still. The London Stock Exchange, NYSE Euronext, Deutsche Börse and two dozen smaller exchanges dominate their respective countries' marketplaces and are taking steps to keep it that way. The Big Three collectively control about 70 percent of the trading in Europe, as counted by euro volume. In advance of the onslaught, they have been improving their technology, cutting their prices and introducing new services.

NYSE Euronext, for example, plans to introduce a new fee package for high-frequency traders. Both the LSE and Euronext plan to offer dark pool services for block trades.

As for Deutsche Börse, it is unfazed by MiFID, according to Michael Krogmann, the exchange's executive director for cash market development. "When MiFID was implemented on Nov. 1 of last year," the executive said at a conference earlier this year, "there was no real change to our business model, because we are used to competition. We have seven regional exchanges competing with us, using the same post-trade infrastructure. We have never had a MiFID concentration rule. It has always been an open space for competition." Still, Krogmann noted that Deutsche Börse is taking the competition seriously. It will build out its systems capacity, reduce latency and "become more competitive," he said.

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